Secretary-General

OECD Global Economic Outlook, November 2013

Angel Gurría, OECD Secretary-GeneralParis, 19 November 2013

Ladies and Gentlemen,

The crisis left us four legacies: first; low growth: the recovery of the global economy is progressing at a moderate and uneven pace. World GDP growth, which averaged about 4 per cent per year in the decade up to the onset of the global crisis, is expected to reach only 2.7% in 2013, the lowest rate since 2009. While we expect global growth rates to move again towards 4 per cent in 2015, the world will continue to be affected by the harsh social legacy of the crisis. In the OECD countries, growth will improve gradually from 1.2% in 2013, to 2.3% in 2014 and 2.7% in 2015.

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Second, we expect unemployment to remain high, at 8% this year for the OECD on average, and falling only slightly to 7.5% by 2015. In the euro area, we anticipate that the unemployment rate will only start to fall in mid-2014 and will be barely below 12% by the end of 2015. The growth rates we are expecting are clearly insufficient to address this major problem. The situation is especially tough for the young, who are experiencing a 16% average unemployment rate in the OECD, with much higher levels in some southern European countries.

The third legacy from the crisis is an increase in income inequality. Market income inequalitywent up morebetween 2007 and 2010 – the worst years of the crisis – than in the preceding twelve years. As long as unemployment remains at high levels, we are unlikely to see much improvement in inequality, which is at the root of much of the ongoing social discontent.

The fourth, and related, legacy is a loss in the public’s trust in their governments. This is described in detail in our recent publications “How’s Life” and “Government at a Glance”, which also show similar declines of public trust in banks, the judiciary system, and other institutions. Regaining this trust will take a lot of work and must start by cementing a sustained recovery that benefits the most vulnerable.

The recovery itself is exposed to potential downside risks, including fiscal brinkmanship in the United States, unresolved banking problems in the euro area, the high debt burden in Japan and financial vulnerabilities in some large emerging-market economies.

I would now like to take a longer-term view: why is the global economy not growing faster at this stage of the economic cycle? And what can policymakers do to improve the outlook for the coming years?

The ongoing economic weakness is the result of the malfunctioning of the four cylinders of the growth engine.

First, investment remains weak. In OECD countries, the volume of fixed investment is some 8 per cent below its pre-crisis peak. Investment growth is also slowing in the emerging-market economies. Growth of investment is below 2%, the slowest in many years and well below trend.

Angel Gurría, OECD Secretary General - 19 November 12013

Second, credit growth remains subdued. The banking sector, particularly in Europe, is still going through a painful deleveraging that is bearing on their capacity to lend. Bank credit in the euro area fell by 4% in the year to September. In the OECD as a whole, it was flat.

Third, trade growth is only slowly picking up. In volume terms the ratio of global trade to GDP remains slightly below its pre-crisis level. Sluggish trade growth (2 – 3%) reflects several factors, including the weakness of investment that I have already mentioned.

Fourth, growth in emerging-market economies has slowed down. In the BRIICS, trend growth declined by 1¾ percentage points between 2007 and 2013. This drop was driven by various factors, including ageing, declining investment growth and a slowdown in productivity.

How can we repair the global growth engine?

The monetary policy accelerator has been pushed to the floor for several years but it cannot be held there indefinitely. It is also showing diminishing returns. The necessary fiscal consolidation leaves little scope for further stimulus. Thus, to return to a strong and sustainable growth path, policymakers need to address the structural weaknesses that hamper the functioning of the growth engine.

The key requirements include:

First, fixing the banks in Europe. This involves addressing the twin problems of non-performing loans and forbearance: recapitalising the banks (ideally without making deleveraging worse) and fully implementing the banking union. Policymakers also need to consider going beyond existing international regulatory initiatives and reforming the business model of banks. The separation of commercial banking and investment banking activities and adopting a leverage ratio of 5% would buttress the resilience of the banking sector.

Second, we need to maintain open markets for trade and investment and reduce trade costs, including through trade facilitation reforms being discussed now at the WTO.There are increasing signs of trade protectionism that could jeopardise the still fragile economic recovery.

Third, governments need to maximise the impact of the recovery on jobs. Greater and more targeted efforts are needed to upgrade the skills of the unemployed and those looking for jobs. Also, more effective labour activation policies are required to ensure that job-seekers are better incentivised in their search for employment. Lastly, progress needs to continue in some countries to add greater flexibility and dynamism in labour markets and to reduce excessively high labour costs.

Finally, there is a need to overhaul regulations that restrict competition and to ensure a more effective policy support of innovation. In particular, policy makers need to adopt a broader concept of innovation, beyond the conventional view in which R&D is pre-eminent. Other assets such as organisational capital and design, and the ability to create value from data, are increasingly central to productivity growth in a knowledge-based economy.

The policy reform agenda has made great strides since the onset of the crisis, particularly in the most exposed countries of the euro area. Reforms are helping to correct economic imbalances that had built up over the last decade. But there is still much to be done, including in emerging-market economies and some OECD countries.

With the slow recovery of the world economy and downside risks looming, there is a pressing urgency to fix the growth engine. Reforms to boost productivity, rebalance the global economy, and reduce structural impediments to job creation remain essential. Decisive government action is also needed to address the social legacy of the crisis. It is not just the recovery that is at risk, but the very fabric of our societies.

I would now like to give the floor to our Chief Economist, Pier Carlo Padoan, who will go deeper in detail and elaborate on our economic forecasts in his presentation.